QBLUE GLOBAL SUSTAINABLE LEADERS FUND

table of contents:

1. Summary

The investment strategy of the Fund is based on the economic rationale that the societal value of companies defined as the sum of private value (traditional company intrinsic value) and public value (sum of positive/negative public externalities, such as air and water pollution, climate and public health impact, gender equality, etc.) – is currently not fully reflected in the valuation of companies. As the public value of business activities increasingly get included in company valuations, it is the Sub-Investment Manager’s (“Qblue”) belief that companies with superior sustainability profiles will outperform their peers.

The Sub-Investment Manager’s approach to sustainability is based on a three-step process.

  1. Engagement and/ or exclusions, seeks to identify the companies in the investment universe to engage with or to exclude;
  2. Identify industries or sub-sectors with unwanted inherent sustainability risks where mitigation is deemed insurmountable;
  3. Utilisation of a proprietary sustainability model, Sustainability Cube™, to identify “best-in-class” sustainable companies.

The model scores and ranks companies in the investment universe according to their sustainability standards along several dimensions. Dimensions considered include, but are not limited to; climate transition, ESG industry leadership and UN SDG alignment.

2. No significant harm to the sustainable investment objective

In order not to do significant harm to environmental or social objectives, the Sub-Investment Manager takes principal adverse sustainability impacts (PAIs) into account in several steps of the investment process.

Company engagement and exclusion: Companies in the investment universe are screened for potential adverse impacts on sustainability factors. The Sub-Investment Manager decides if flagged companies are to be excluded from the investment universe or if progress can be made by engaging with the company.

Exclusions:

  • Norms based exclusions: Intentionally and repeatedly violate rules laid down by national authorities on the markets in which the financial product invests or by central international organizations generally endorsed by the global community. This includes, but is not limited to:
  • UN Global Compact
  • OECD Guidelines for Multinational Enterprises
  • Country exclusions: Domiciled in countries covered by EU or UN sanctions, as well as countries where the sustainability risk with regards to money laundering, bribery, terrorist financing and tax avoidance are deemed unacceptable. The list of excluded countries is updated on an ongoing basis.
  • Industry/Sector exclusions: Companies with business activities in industries with excessive risk of principal adverse sustainability impacts. This includes, but is not limited to, the following industries:
  • Tobacco
  • Thermal coal mining
  • Nuclear weapons
  • Controversial weapons
  • Oil sand extraction
  • Adult entertainment
  • Arctic drilling and exploration

Sustainability Cube™ score: the Sub-Investment Manager evaluates the sustainability characteristics of all companies in the investment universe using their own proprietary sustainability model, the Sustainability Cube™. The model includes several principal sustainability impact indicators on environmental, social and governance issues. The Sustainability Cube™ model supports the “do no significant harm principle” by:

  • Excluding companies with the 10% worst social scores
  • Only selecting companies for investment if they are among the 10% best rated within their region and industry. If a company at a later stage falls below the 15% best companies, the company position is closed out

The Sub-Investment Manager considers PAIs of investment decisions on sustainability factors in several steps of the investment process:

  • Identification of which companies to engage with and to exclude
  • Identification and exclusion of excessive sustainability risk industries
  • Identification of countries ineligible for investment (country exclusion)
  • Selection of investee companies, PAI indicators are sub-components in the combined Sustainability Cube™ score, and hence involved in the selection of portfolio companies.

Data coverage on PAIs is uncomplete and data quality varies across indicators, but the field is going through a significant development. The Sub-Investment Manager closely monitors this development and incorporates additional indicators as data coverage and quality improves.

The Sub-Investment Manager does not invest in companies that intentionally and repeatedly violate rules laid down by national authorities on the markets in which the company operates or by central international organizations generally endorsed by the global community. This includes but is not limited to UN Global Compact and OECD Guidelines for Multinational Enterprises.

3. Sustainable investment objective of the financial product

The investment objective of the Fund is to provide long-term capital growth, investing globally in the shares of companies that the Sub-Investment Manager believes contribute positively to social and environmental factors. The Fund aims to achieve its objective by investing in companies that, as measured by the Sub-Investment Manager´s proprietary sustainability model (the Sustainability Cube™), are ESG industry leaders, best positioned for the transition to a low carbon economy and aligned with the UN SDGs.

4. Investment strategy

The financial product invests in developed market liquid equity securities subject to the exclusions described in the section ‘No significant harm to the sustainable investment objective’.

Companies in the investment universe are ranked based on the Sustainability Cube™ score, and the 10% highest scoring companies in each industry in each region are selected for the portfolio. If a company at a later stage falls below the 15% best companies, the company position is closed out. This part of the investment process is an important step towards achieving the sustainability objective of the financial product of investing in companies that the Sub-Investment Manager believes contribute positively to environmental and social factors.

Thereafter, the Sub-Investment Manager deploy a multi-step conviction weighting methodology, based predominately on the Sustainability Cube™ score, meaning the higher such Sustainability Cube™ score the higher portfolio weight.

Company dialogue is an important part of the Sub-Investment Manager’s sustainability framework, as they believe engagement is generally the best strategy for contributing to improving sustainability and responsible behaviour in companies. As a general rule, the Sub-Investment Manager intends to exercise its voting rights in investee companies. The Sub-Investment Manager aims to protect and grow the value of investments by ensuring that the portfolio companies diligently mitigate risks and have the lowest possible capital costs, by acting responsible, and at the same time encouraging companies to grow earnings by pursuing sustainable opportunities that support the goals of society and the global community. This forms the basis for the principles for exercising the voting rights.

The Sub-Investment Manager assesses governance practices of investee companies when identifying companies for engagement and exclusions. Moreover, assessment of governance practices of investee companies is naturally integrated into the selection process of investee companies.

  • Engagement and exclusions
  • The Sub-Investment Manager excludes companies which intentionally and repeatedly violate rules laid down by national authorities on the markets in which the Fund operates or by central international organizations generally endorsed by the global community
  • This includes, but is not limited to, UN Global Compact and OECD Guidelines for Multinational Enterprises
  • Selection of investee companies
  • Corporate governance is a key element of the ESG industry leadership dimension of the Sustainability Cube score, as well as sub-components of the UN SDG dimension
  • Investee companies needs to be among the most sustainable companies, as measured by the Sustainability Cube, in order to be included in the portfolio

5. Proportion of investments

The Sub-Investment Manager classifies an investment as sustainable, i.e. an activity contributing to environmental and social factors, as defined under the SFDR, if the combined Sustainability Cube score of the investee company ranks in the top 25% within its region and industry. The sustainable investment objective is attained when (at all times) the portfolio weighted score of investee companies is higher than the 90th percentile (top 10%) in that region and industry

The combined Sustainability Cube score measures the combined contribution to both environmental and social objectives, and the Sub-Investment Manger’s believes that a superior broad sustainability profile is the most credible indicator for superior contribution to both environmental and social objectives.

The Sub-Investment Manager believes that sustainable investments, as defined above, contribute to both social and environmental factors. As sustainable investments need to be classified as either environmental or social under SFDR, the Sub-Investment Manager uses the ranking of the Climate Transition component of the Sustainability Cube to calculate contribution to environmental factors and the ranking of the UN SDG component of the Sustainability Cube to calculate contribution to social factors. The relative degree of contribution to environmental and social factors will determine the split of sustainable investment into environmental investments and social investments. At any given point in time, the sum of environmental investments and social investments will be equal to the total amount of sustainable investments, but the split between environmental investments and social investments may vary over time.

Under normal circumstances, in order to attain the sustainable investment objective, the Fund is generally expected to invest at least 95% of its equity exposure in companies classified as sustainable investments as defined above. The Fund may also hold cash or cash equivalents, and the Fund may use derivative instruments for the purposes of efficient portfolio management and hedging under the conditions and within the limits laid down by the Central Bank.

The minimum degree to which investments in the Fund are in environmentally sustainable economic activities (“taxonomy aligned”) is 5%.

6. Monitoring of Sustainable Investment Objective

The Sub-Investment manager will, on an ongoing basis, evaluate if the sustainable investment objective has been attained.

As described within the Investment Strategy section, companies in the investment universe are ranked based on the Sustainability Cube™ score, and the 10% highest scoring companies in each industry in each region are selected for the portfolio. The sub-investment manager continuously monitors this scoring to ensure investment only in the best sustainable companies as ranked by the Sustainability Cube™, if a company at a later stage falls below the 15% best companies, the company position is closed out.

7. Methodologies

The sustainable investment objective is obtained if the capital weighted average Sustainability Cube™ score of the portfolio companies, within each industry (as per MSCI GICS level 1) within each region, is better than the 90th percentile of the sustainability scores.

For each region and industry, the distribution (across business days) of the capital weighted average Sustainability Cube™ score of the portfolio companies are calculated. The objective is attained, if the average score is above the 90th percentile for at least 90% of the time in all regions and industries.

As mentioned above, the combined Sustainability Cube™  score measures the combined contribution to both environmental and social objectives, and the Sub-Investment Manger’s believes that a superior broad sustainability profile is the most credible indicator for superior contribution to both environmental and social objectives.

The Sub-Investment Manager believes that sustainable investments, as defined above, contribute to both social and environmental factors. As sustainable investments need to be classified as either environmental or social under SFDR, the Sub-Investment Manager uses the ranking of the Climate Transition component of the Sustainability Cube™ to calculate contribution to environmental factors and the ranking of the UN SDG component of the Sustainability Cube to calculate contribution to social factors. The relative degree of contribution to environmental and social factors will determine the split of sustainable investment into environmental investments and social investments. At any given point in time, the sum of environmental investments and social investments will be equal to the total amount of sustainable investments, but the split between environmental investments and social investments may vary over time.

8. Data sources and processing

Data for the Sustainability Cube™ is obtained from various data providers and data sources:

  • MSCI (carbon emissions, environmental, social, and governance data, UN SDG alignment)
  • Macro data at segment or geographic level from academic, government, NGO datasets
  • Company disclosure (sustainability report, proxy report, AGM results, etc.)
  • Government databases, media, NGO, other stakeholders
  • Companies are invited to participate in a formal data verification process.
  • Matter (sustainability sentiment data)
  • Natural Language Processing of UN SDG related news from 30.000 – 60.000 daily news articles
  • Google patent database (green patents)
  • Patent applications from 17 patent offices around the world.

Data quality assessment is performed by the data provider as well as by the Sub-Investment Manager.

  • MSCI
  • Quality Review Committee: This committee aims to conduct data quality checks on all companies prior to publication. Automated quality database checks flag to the committee when pre-specified conditions relating to score changes are triggered, or any suspect values.
  • Data review and company communication: A data review process that allows companies to comment on the accuracy of company data for all MSCI ESG
  • Research reports
  • Companies are invited to participate in the data review process prior to the annual update
  • 50% of companies returned substantive feedback on ESG research in 2018
  • Matter
  • Out of sample validation: The Natural Language Processing algorithm is validated on an ongoing basis. Random sample of news data identified as either positive or negative for the SDGs are assessed by human eye
  • Sub-Investment Manager
  • Data consistency checks
  • Quality sampling
  • Completeness assessment

An aggregated Sustainability Cube™ score is calculated for the purpose evaluating the overall sustainability characteristics of companies in the investment universe. The objective, in designing this scoring framework, has been to create a robust and balanced measurement. The scoring methodology of the Sustainability Cube™ measures sustainability along several dimensions, with different indicators being considered in each dimension in order to attain the sustainable investment objective of the financial product. Dimensions include, but are not limited to:

  • Climate transition (climate): indicators include, current carbon footprint, carbon targets, decarbonization initiatives and development of products and services supporting greenhouse gas emission reduction
  • ESG industry leadership (ESG): current ESG score, ESG progress score and controversies screening
  • Alignment with UN SDGs (SDG): UN SDG revenue, measured as company revenues aligned with the UN SGDs, Development of products and services supporting the UN SGD

Evaluation of sustainability characteristics within these dimensions is assessed through three different approaches:

  • Actual: Assessment of current positive and negative sustainability impacts. Indicators include current carbon emissions, as well as current revenues and products aligned with the measured sustainability dimension
  • Progress: Measures how well the company is positioned for and contributes to the transition to a more sustainable economy. Indicators include contribution to relevant innovation, as well as goals and targets for reducing future sustainability impacts and risks
  • Sentiment: Measures how well the company’s sustainability efforts are perceived by the public? Indicators are based on published news articles from trusted sources, such as financial media, think tanks, and NGOs

The Sustainability Cube™ framework aggregates Actual, Progress, and Sentiment scores within each sustainability dimension (Climate, ESG, and SDG). The combined Sustainability Cube™ score is calculated as the geometric average of the scores from the three sustainability dimensions. The combined Sustainability Cube™ score is used to measure attainment of the sustainable investment objective.

9. Limitations to methodologies and data

Assessing a company’s sustainability status may have challenges related with the need for improved quality of the sustainability data available. Challenges include:

  • Sustainability analysis requires a broad range of supplementary data and data quality enhancements to ensure robustness, as sustainability data may initially be insufficient and incomplete
  • Sustainability is a dynamic process and changes over time.
  • Sustainability should be measured based on the companies’ current position as well as the forward looking trajectory, and if possible with the addition of measures of sentiments and perceptions of the companies’ sustainability standards but backward looking information fails to capture direction of travel.

These challenges are addressed by:

  • Use of varied data sources and sustainability dimensions;
  • Real time controversies screening to ensure potential issues are addressed early;
  • Data provider engagement to fully understand the data; and
  • The robustness of the multi-dimensional Sustainability Cube™.

Sustainability factors are in nature challenging to measure, and the data involved is often incomplete and insufficient.  Missing data in sub-dimensions of the Sustainability Cube™ are imputed on a best effort basis to avoid excluding companies with incomplete sustainability data. The Sub-Investment Manager believes that, in order to attain the sustainability objective of the financial product, it is absolutely key to allocate significant resources, on an ongoing basis, to search for new relevant data sources and develop tools to optimize the insight of existing data.

In addition, the Sub-Investment Manager aims to always measure sustainability factors using various data sources and cover different aspects of such factors. The philosophy behind the Sustainability Cube™, used in the investment process, is that sustainability is multi-dimensional and dynamic, and no single data point can capture all aspects of any environmental of social factor.

10. Due diligence

As the investment strategy of the financial product is systematic and rule based, the investment strategy implementation as well as the monitoring of investee companies on relevant matters, including financial and non-financial performance and risk, capital structure, social and environmental impact and corporate governance, are mainly based on quantitative measures.

As the financial product only invests in liquid financial instruments traded on a regulated marketplace under a transparent disclosure regime a lot of the required data regarding financial information is publicly available in good quality. With respect to sustainability, data is not as easily accessible, and is often short, incomplete and to some degree noisy. As a consequence, an important part of the investment due diligence is to make sure that relevant data for ensuring compliance with the regarding financial and non-financial topics, including sustainability, are available in a good quality as described in the Data Sources and Processing section.

11. Engagement policies

Engagement for financial product follows the Sub-Investment Manager’s general engagement policy:

https://qbluebalanced.com/policies/

Company dialogue is an important part of the Sub-Investment Manager’s sustainability framework, as they believe engagement is generally the best strategy for contributing to improving sustainability and responsible behaviour in companies. As a general rule, the Sub-Investment Manager intends to exercise its voting rights in investee companies.

The Sub-Investment Manager aims to protect and grow the value of investments by ensuring that the portfolio companies diligently mitigate risks and have the lowest possible capital costs, by acting responsible, and at the same time encouraging companies to grow earnings by pursuing sustainable opportunities that support the goals of society and the global community. This forms the basis for the principles for exercising the voting rights.

12. Attainment of the Sustainable Investment Objective

This section is only relevant for prodThe Fund has not designated a reference benchmark for the purpose of attaining its sustainable investment objective.